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2008-12-12 16:37:01

Keeping Up With Short Sale Developments

There is a lot of misinformation concerning how a short sale or a foreclosure affects a FICO score. From our research the initial credit hit of a foreclosure and a shortsale are virtually the same. Credit experts report that there will be up to a 300 point credit hit when someone does a short sale or a foreclosure. However, the long term effects of either are radically different..

The main difference is how long the credit is damaged and if there will be any deficiency judgements.

Even well known financial experts like Suzy Ormond ( we love Suzy btw) are offering misinformation about this. I was watching her on Larry King offering advice to a home owner who was upside down in their home….Suzy told her to “send the keys back to the lender”. She didn’t even mention doing a short sale. Nor did she explain the credit ramifications.

No wonder people are so confused.

Let's be clear about this next point. There are definite advantages to a short sale but it has little to do with how many points a short sale will drop a FICO (in the short term) versus a foreclosure.

Unfortunately, in most communities, houses are over valued and markets will no longer support asking prices. There was a study released recently that reported that at least 50% of all homes in the US were ‘upside down’ or at least have no equity. Another report showed that there are only three communities in the US that have rising appreciation, strong sales and few if any foreclosures. Did you read that…ONLY 3. In many cases the homeowner is unable to structure a workout or a forbearance agreement with the foreclosing lender. A short sale is the next best option.

Clear benefits of the short sale. (New Information)

Fannie Mae recently established a 2-year elapsed time period for reestablishing credit for homeowners who sell their homes through a short sale. Two years may seem like a long time to wait before being able to get a new loan, but compare this to what happens if the homeowner goes through the foreclosure process. According to the Fannie Mae guidelines, effective May 31, 2008, a homeowner who has filed a foreclosure will be “ineligible” for a loan for five years. (You can get a full report on the new guidelines on www.TimandJulieHarris.com.

Again..this is a crucial point. Someone goes through foreclosure…no Fannie Mae backed mortgage for FIVE YEARS…in all reality that means that they will be renters for at least 5 years. To put his into perspective if someone has a bankruptcy they can’t buy for 7 years. This should tell you how much Fannie Mae prefers homeowners short selling over foreclosure.

Consider the fact that property values will most likely fall for the next 12-24 months anyway so, not being able to buy a home for 24 months really isn’t all that bad.

The other huge benefit of doing a short sale involves something called a deficiency judgment. When a house is sold at auction (foreclosure), the chances of the foreclosing lender filing a deficiency judgment increases dramatically.

How does this work?… , a deficiency judgment is obtained when a property is foreclosed and sold (usually at the courthouse by the clerk of the court) to the highest bidder. In most states a deficiency judgment can be obtained for the difference between the high bid and the higher foreclosure judgment amount. Usually the court determines which value is higher, the high bid or the appraised value of the property on the date of the public sale. The higher of the two is taken to determine the difference from the judgment amount, and this difference is the deficiency judgment (what was owed subtracted by the final sale price).

Deficiency judgments are just that: judgments. In other words, a debt that has to be paid. They are an albatross around the neck of the debtor and can only be removed by paying it off or by bankruptcy. Furthermore, deficiency judgments usually earn interest until paid.

If a homeowner has deficiency judgment, guess what? They won’t be able to buy anything using credit. New house? Forget it. New car? Nope!

In the past few deficiency judgments have been filed against foreclosing homeowners, that may change. Banks seldom enforce deficiency judgments, they sell the judgments for 5 to 10 cents on the dollar. Here’s the deal that the bank has to consider . . .for a $100,000 deficiency judgment they invest $500 in attorney fees and get $10,000 in return just for pushing paper. In other words, they get the judgement…then sell it to a 3rd party for 10% of the amount.

Our short sale students know that they can negotiate an unsecured promissory notes. Sometimes when the second lien holder won’t release their lien in order for the short sale to close our students know how to structure an unsecured loan for 10% or less of the amount. Usually at no or very low interest. The banks do the same thing –– getting 5 cents on the dollar.

Another point of consider, if the house goes into foreclosure and is taken back by the bank to be listed as an REO, the meter keeps running on the costs incurred by the bank until the REO dept. sells the house. This can make the deficiency huge. In other words, the former homeowner is on the hook for all the banks costs…not just the loss from the negative equity.

Realtors who know how to do short sales offer homeowners a way out. Whatever effect a short sale has versus a foreclosure on one’s FICO score pales in comparison to the long term harm of a deficiency judgment and the inability to be approved for a loan for years to come.

Look for a loosening of these regs in the next 180 days. In other words, FANNIE/ FREDDIE will be the new sub-prime lenders. I recently came across (on the HUD website) that someone can get a FHA loan with 30% down...and a credit score or less than 500.

Obviously, their other factors have to be strong but, still...welcome back Sub-Prime.

What will have to happen? Short Sale sellers are treated to almost immediate re-approval for buying again. Why? Liberal politics and WAY too many homes for sale. We expect there to be a mortgage program coming out next June/July that allows someone who has a low credit score, a short sale within 12 months and 10% down to be able to buy using the FHA...and get a $7,500 tax credit.

Stay tuned.

(Harris Real Estate University is a RealTown Approved Vendor. Tim and Julie Harris have been leaders since day one of their careers. After selling more than 100 homes their very first year (and every year after), they gained great acclaim when the National Association or Realtors named them Agents of the Year in 1997. They have contributed directly to the success of thousands of real estate professionals nationwide, through their unique and proven techniques. With over 50,000 coaching calls logged, they are proud to have some of the most successful agents in the country enrolled at The Harris Real Estate University.)